Moldova’s central bank, the National Bank of Moldova (BNM), on March 21 cut the monetary policy rate (chart) by 50 basis points (bp) to 3.75% in the second such move this year, bringing the rate below the headline inflation rate (4.3% y/y in February) and close to the lower limit of the target band (5% +/-1.5pp ).

It is a doveish policy that the monetary authority admits as such and explains it as aimed at “stimulating aggregate demand, including by encouraging consumption and investments, balancing the national economy and anchoring inflationary expectations”. 

The decision of the National Bank of Moldova aims “to slow down the decrease in inflation”, the monetary authority’s press release reads.

Besides keeping the inflation close to the (rather high) 5% target, the policy also helps the government boost the economy and finance the budget at a more affordable cost.

Headline inflation in Moldova indeed eased to 4.31% y/y in February from 4.55% y/y in January, remaining in the lower half of the 5%+/-1.5pp target band for the third consecutive month. The regulated energy prices will decrease during the first half of the year.

The central bank targets 5% inflation with a +/-1.5 percentage points band, and it said on February 6 that it expects actual inflation will remain within the target band over the coming eight-quarter forecast period.

On March 21, the BNM largely confirmed the inflation forecast adding that the balance of risks is skewed on the lower inflation side.

National Bank of Moldova has been headed since the beginning of the year by Romanian governor Anca Dragu, brought in by President Maia Sandu overnight from the top of Romania’s Senate. She replaced Octavian Armasu, dismissed with no prior warning by lawmakers on the grounds that he had hindered investigations related to the frauds in the banking system that surfaced in 2015, long before he arrived at BNM.

Moldova’s budget deficit financing will rely heavily on domestic borrowing this year and in 2025, as the inflows of foreign grants and loans received by the country from the development partners and IFIs will shrink to 1.9% in 2024 — the lowest level in the 2021-2026 period. The inflows accounted for 5.1% of GDP in 2023 (6.5% in 2022). Moldova’s deficit will decrease from 5.9% of GDP in 2023 to 4.6% of GDP in 2024 and 3-4% of GDP in 2025-2026.

Domestic borrowing will decrease nominally and as a share of the public deficit (30%) but besides the financial assets operations (37% of the public deficit, mainly recovery of funds previously lent to energy trader Energocom) will finance two-thirds of the general government’s deficit this year.

The net flow of foreign loans will decrease from 2.9% of GDP in 2023 to 1.2% of GDP in 2024, covering only 26% of the public deficit (49% in 2023).